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The CAA proposes new fees for using Heathrow – and airlines are not happy

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The on-going battle between Heathrow Airport and the UK Civil Aviation Authority (CAA) over what it can charge airlines – which falls straight through to the price of your ticket, as one of the ‘taxes and charges’ you pay – has entered its next phase.

Heathrow believes that, since its income is effectively capped by the CAA at below the market rate, it deserves some retrospective protection for the drop in income last year. That said, it still reportedly paid out a £106m dividend to its shareholders and did not need to raise new equity.

The airlines believe that Heathrow has a de facto monopoly on premium air travel in London and should be constrained appropriately, for the benefit of passengers and the wider economy.

The CAA publishes its view on Heathrow's proposed fee increases

As we covered earlier this year, Heathrow Airport has already added an £8.90 surcharge to all tickets issued.

It is fully within its rights to do this, since there is an agreement with the airlines that guarantees a minimum income level to cover the cost of running certain facilities. This income level was not reached in 2020 and the £8.90 surcharge will continue until the difference is made up.

Heathrow’s original proposal to the CAA was for the Passenger Service Charge to increase like this:

  • domestic charges increased from £10.98 in 2021 to £12.26 in 2022
  • short haul charges increased from £15.98 in 2021 to £19.76 in 2022
  • long haul charges increased from £38.33 in 2021 to an astonishing £67.86 in 2022

This won’t be happening.

However, an interim price control averaging £29.50 per passenger is proposed from January 2022. This is up sharply from the current average of £22 per passenger. This interim figure will operate until Summer 2022 when the new five year charging period will begin.

What has the CAA proposed?

The UK Civil Aviation Authority published its thoughts for the 2022-2027 charging period yesterday. It suggests:

  • a (hugely vague) average charge of somewhere between £24.50 to £34.40, compared to the current average of £22 per passenger (the original Heathrow proposal above averages out at £38 per passenger)
  • an interim price cap of £29.50 to be put in place for Spring 2022 whilst discussions continue
  • no additional one-off adjustments on top of the £300 million of additional asset base increase that was allowed earlier this year. This means that Heathrow’s request for a payment of £2,300 million to cover its covid losses (paid via an increase in Regulatory Asset Base) will not happen.
  • an agreement to cap both the upside and downside to Heathrow of actual passenger levels versus forecast levels over the next five years
The CAA publishes its view on Heathrow's proposed fee increases

The CAA was very positive about it’s proposals. CEO Richard Moriarty said:

“While international air travel is still recovering, setting a price control for Heathrow Airport against the backdrop of so much uncertainty means we have had to adapt our approach. Our principal objective is to further the interests of consumers while recognising the challenges the industry has faced throughout the Covid-19 pandemic. These initial proposals seek to protect consumers against unfair charges, and will allow Heathrow to continue to appropriately invest in keeping the airport resilient, efficient and one that provides a good experience for passengers.”

That is one view. Shai Weiss, CEO of Virgin Atlantic, went batshit crazy:

“Today’s initial proposals from the Civil Aviation Authority fail to protect the British consumer, paving the way for Heathrow Airport to introduce unacceptable charges, just as international travel resumes at scale. The world’s most expensive airport risks becoming over 50% more expensive, as Heathrow and its owners seek to recoup their pandemic losses and secure hundreds of millions in dividends to shareholders. It is concerning that the regulator has failed in its first opportunity to step in, and together with industry partners, we will oppose these proposals in the strongest terms to protect passengers.

“Abusing its unique position as the UK’s only hub airport, Heathrow’s proposed increase of charges will hurt the UK’s economic recovery and unfairly hit the pockets of families and businesses around the nation. No other airport in the world is proposing increases on this scale and by becoming unaffordable, competing EU hubs and airlines will benefit.”

Even the CAA admits, in the consultation document, that:

“Increases towards the upper end of our range could cause material consumer detriment.”

Virgin Atlantic claims that the CAA is unduly pessimistic in assuming a 44% fall in passenger numbers in 2022 versus 2019. This is, however, more optimistic than the forecast submitted by Heathrow. Virgin Atlantic believes that passenger numbers are likely to be down by just 5% on 2019 levels.

The CAA proposals are not set in stone. Two industry consultations will now take place, on the interim 2022 price cap and the wider proposals, before the final figures are published.

One upside is that the CAA admits that ‘gold plating’ needs to end. At present, because Heathrow’s agreed returns are based on what it invests in the airport, there is an incentive to – literally – gold plate the toilets if allowed. The more it spends, the more it can earn. The CAA says:

“we consider that stronger incentives are needed to protect the interests of consumers from the increased costs that they would otherwise face were HAL to make inefficient capex investments.”

You can read the full CAA consultation document here.

Comments (72)

  • Susan says:

    The value of investments can go down as well as up. If LHR’s owners think the company is doing well enough to take cash out of the business then it doesn’t need to price-gouge customers.

    • Tim says:

      Quite. It is nonsense like this that gives capitalism a bad name. If private investors don’t really put their capital at risk, then their is no moral or economic justification for their profit. Profit is litterally the price paid to capitalists to risk their capital.

  • Fly1A says:

    Passenger numbers will not resume to 2019 levels until airline fares match what the travelling public consider reasonable.
    LHR does not need the extra taxation money – that is one reason why a sensible company builds up reserves. They have a monopoly on international travel ( as anyone who has flown from Manchester or Birmingham or Gatwick will know!). Hence they should quite rightly be controlled by regulatory bodies.

    • J says:

      The last two years have shown that a sensible travel infrastructure company pay all cash out as dividends to shareholder and forces a bailout from the government when times get tough.

  • Dubious says:

    I am not sure where they are investing their CapEx, perhaps it is on the new ANPR cameras, but I find their toilets are plated with something darker than gold…

    It would be nicer if they installed showers instead, especially in the arrival hall.

  • Paul says:

    These proposal that passengers pay £43 to stand in endless lines and experience some of the worst service in the world was outrageous. And this on top of car parking charges and drop off fees.
    Heathrow is the only game in town (sadly) and it’s gouging of the consumer rightly needs controlling.
    The earlier comment about the lavs at Heathrow was spot on.

  • BJ says:

    While no fan of the Heathrow status, position, monopoly or whatever else we care to call it, I have little sympathy for the airlines since they encourage the status quo. They have a choice, they could put their money where their mouths are and fly their wings elsewhere. This would benefit other airports and regional economies, and passengers alike. In recent years pre-covid, growth in frequencies and destinations from airports outside London by both LCC and flag carriers has shown it was nonsense to suggest that demand was not there. It clearly was, very likely remains, and will very likely grow in the longer term. In the absence of policy and regulatory tools to reshape the air passenger industry across the UK, the potential to do so falls on the airlines and airports themselves. Three things I would like to see go though are APD, airline joint ventures, and airport groups. All three are clearly a pipe dream but we can dream.

  • Derek Roger Jones says:

    Give it another 30 years of Climate Change and you won’t be flying anywhere.
    Arrivals would be treated to a free shower anyway.

  • Magic Mike says:

    £2,300,000 million = £2.3 trillion?!

    I agree with BJ, if the airlines don’t like it they need to vote with their feet. Pulling back from LGW, for example, is not helping.

  • JRC says:

    Very true on toilet gold plating, a former colleague worked their and looked after IT spend. They had a sizeable annual budget and had to cook up ways to spend it to ensure they a) got the same or more budget next year and b) could in turn charge more to passengers. Very bizarre set up.

    • Rui N. says:

      Not bizarre at all. It’s common behaviour in companies with regulated rates of return (telecoms used to the same; non-profits – which self impose a 0% rate of return – also tend to the same). It’s called the “Averch-Johnson effect” in the economic literature.

      • Lady London says:

        Oh no….and I thought the old “cost plus” basis on which government expenditure used to be made, encouraging massive overspend, poor decisions, and loose controls, had been discredited and abandoned 30 years ago.

        Are you guys saying they’ve allowed privatised entities like Heathrow to charge on this basis? You really, really couldn’t make it up.

        • Rob says:

          Heathrow returns have always been based on a % of invested capital. Same as Thames Water, hence Super Sewer (which will presumably have gold lining on the tunnels).

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